Speak To A Live Person: 888.302.4594 Request A Demo

SEC Guidance to Fund Advisers Serving “at cost” or for no Compensation

Thursday, January 16, 2014

The U.S. Securities and Exchange Commission’s Division of Investment Management has recently offered guidance with regards to Fund Advisers serving “at cost” or for no compensation (No. 2013-09 Oct 2013). At the heart of the guidance are a couple of Sections of the Investment Company Act of 1940 (Company Act) that appear to question whether a person or company that temporarily serves a fund “at cost” or for no compensation is an investment adviser under the Company Act. Section 2(a)(20) of the Company Act defines an investment adviser of an investment company to include, any person “who pursuant to contract with such company regularly furnishes advice to such company with respect to the desirability of investing in, purchasing or selling securities or other property, or is empowered to determine what securities or other property shall be purchased or sold by such company.” Section 2(a)(20)(iii) on the other hand excludes from this definition “a company furnishing such services at cost to one or more investment companies, insurance companies, or other financial institutions.”

A common example of an investment adviser offering temporary advisory services to a fund at cost or for no compensation involves an “assignment” of an investment advisory contract. Section 15(a)(4) of the Company Act says it is unlawful for a person to act as investment adviser for a fund except pursuant to a written contract which must be approved by the vote of a majority of the fund’s outstanding voting securities and must provide for the contract’s automatic termination in the event of its assignment. Since assignment can include any direct or indirect transfer or hypothecation of a contract by the assignor or of a controlling block of the assignor’s outstanding voting securities, it can be difficult for a fund to get timely shareholder approval of a new advisory contract.

However, Rule 15(a)(4) also provides a temporary 150-day period during which a person may act as an investment adviser for a fund under an interim contract without shareholder approval, subject to specified conditions. Under Rule 15(a)(4), in the event of a failure to obtain shareholder approval as provided for in the rule, the investment adviser may be paid its costs incurred in performing the interim contract. Although rule 15(a)(4) provides relief for substantially all circumstances in which a fund might need additional time to obtain shareholder approval of an advisory contract in the case of an assignment, division staff occasionally have also provided similar relief in no-action letters for particular circumstances.

And while the Commission has granted certain temporary exemptions from the provisions of Section 15(a)(4) conditioned on such person’s serving during the interim period on an “at cost” basis or for no compensation, it did not interpret such persons to not be investment advisers as defined in Section 2(a)(20) which would be inconsistent with the investor protections mandated by the Company Act.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

  • Categories

  • Get Started